Battle between branded and generic drugs

The Professor Emeritus from the Faculty of Medicine, an eminent academic and respected physician, was extremely unhappy. His colleagues, despite repeated pleadings, have been prescribing branded drugs to patients oblivious of the high costs to them. “Multinational drug companies are charging exorbitant prices for their branded products when the same drug in generic form is available at a fraction of the price. Our physicians also support them by prescribing the branded drugs to patients. Drug companies are paying to physicians in various forms and that practice is highly unethical” he complained.

“That can’t be avoided” I said. “You’ve to blame the government controls and the peculiar nature of the drug market for that, as you say, undesirable development”

He did not want to give in easily. So, he demanded a fuller explanation.

“Governments throughout the world…” I started my explanation. “…have controlled the production and prescription of what’s known as western drugs. The declared goal of this is to protect the patients. So, all western drugs have to go through a very stringent approval procedure before they’re released to the market. Not only that, government rules have dictated that these drugs should be prescribed by a qualified physician, if they’re to be sold by a pharmacist. The first rule makes the manufacturing of drugs expensive. The second one has distorted the drug market” He looked at me as if he could not understand the logic. So, I continued. “The approval process requires drug manufacturers to continue testing those drugs first with animals and then with human beings for about three to four years. The test reports have to be maintained laboriously to satisfy drug approving authorities. All these are very costly. Hence, drug manufacturers have to spend almost an equally large amount on testing as developing and manufacturing the drugs. As a result, those branded drugs are normally very expensive.”

“Then, how come those generic drug producers could supply them at a lower price?” He countered me. I explained.

“Those generic manufacturers don’t spend any money on research and development. They simply copy the formula and manufacture drugs. So, they don’t have development and approval expenses which the branded drug manufacturers would have to recover from buyers. Also, according to US patent rights, after 10 years, a patent holder loses the right and anyone could manufacture the drugs. This short time duration forces branded drug people to recover their very high research and development expenditure and other costs on approval and so on, as quickly as possible. Hence, drugs are priced to recover the total costs within the first four to five years and earn a sufficient profit rate during the balance five year period. You’ll therefore see that generic manufacturers are free riders who live on the labour of others.”

“What’s wrong with that if patients get cheaper drugs?,” he questioned.

“The problem is that if branded drug firms don’t do research and development, then, we don’t have drugs at all for generic people to copy. The pharmaceutical industry is one of the industries that spend a very large proportion of its income, usually about 10 percent, on research and development. Besides, we’ve problems regarding the quality maintenance of generic drugs. Patients very often pay low prices, but, at the same time, get low quality drugs that lead to other types of complications,” I answered.

“Oh, that’s why pharmaceutical firms bribe physicians to prescribe branded drugs,” he commented.

“Yes, but it’s the governments which have paved the way for them to do so. This is because, the government regulations making prescriptions mandatory have made the drug market a peculiar one different from others. In any normal market, the man who places the order for a commodity is the one who pays for the commodity as well. For instance, if I want to have a coconut, I place the order by demanding the coconut and I pay for the coconut as well. So, I’ve all the incentives to demand the best coconut at the lowest price. This doesn’t happen if the order is placed by one person and the payment is made by another. Then, the man who places the order doesn’t have incentives to order the cheapest.”

“You mean to say that the drug market is distorted like that?” He asked.

“Yes,” I said. “Because of the mandatory prescriptions, orders for the drugs are placed by the physicians by writing the prescription. But, the payment for the drug is made by the patient who has no say on the matter. So, physicians have no incentives to order the cheapest.”

“Amazing,” he said. “But, why don’t physicians act according to their conscience and go by social responsibility considerations?”

“Since, we’ve assigned the monopoly power to physicians by law, drug companies do marketing only with physicians and never with patients who pay for them and consume them. So, drug companies have all the incentives to nurture physicians. Besides, physicians have doubts about the quality of generic drugs. So, they prefer to prescribe branded drugs which they believe to be of required quality compared with generic drugs.”

“So, our problems have been created by our own desire to regulate the western drug industry?” he posed it as a question.
“Yes,” I said. “It’s a good example of the operation of the law of unintended consequences. You try to do something good, but end up doing something very bad.”